Covid W/Contractionary Fiscal Policy

• What happens to disposable income if contractionary policy involves tax increases or reductions in government transfers?

  Disposable income decreases.
• How does decreased government spending affect demand for goods and services?

  It results in decreased demand for goods and services from businesses.
• What is the relationship between decreased demand for goods and services and job losses?

  Decreased demand can lead to job losses as businesses may need to cut costs.
• What is 'crowding in' in the context of decreased government borrowing?

  'Crowding in' refers to lower interest rates making borrowing for investment less expensive for businesses.
• How does contractionary fiscal policy affect asset prices and consumer spending?

  It can decrease asset prices, leading to decreased wealth effects that can decrease consumer spending.
• What are the microeconomic effects of contractionary fiscal policy?

  1. Decrease in disposable income
  2. Decreased demand for goods and services
  3. Potential job losses
  4. Crowding in
  5. Decreased wealth effects
• What is the impact of contractionary fiscal policy on economic growth?

  It can decrease demand and potentially slow economic growth.
• How does contractionary fiscal policy affect unemployment levels?

  It can lead to higher unemployment levels due to decreased government spending and higher taxes.
• What effect does contractionary fiscal policy have on inflation?

  It can help reduce inflationary pressure if the economy is experiencing inflation.
• How does funding contractionary fiscal policy affect public debt?

  It often involves reducing borrowing, which can decrease the level of public debt.
• What is the impact of decreased aggregate demand on the current account?

  It might decrease imports, leading to an improved current account.
• What are the macroeconomic effects of contractionary fiscal policy?

  1. Decreased economic growth
  2. Increased unemployment
  3. Decreased inflation
  4. Reduced public debt
  5. Improved current account